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Looking for Vision in a massive telematics investment

The biggest U.S. fintech funding round of 2018 was rather unexpected: a $500 million capital infusion into Cambridge Mobile Telematics Inc. from SoftBank Group Corp.'s Vision Fund. While it is common for the Vision Fund to make big bets, the target seemed an unlikely one, as it is not one of the "unicorns" routinely covered in the press. It left us wondering what is unique about CMT that would warrant such a large private placement, one that could imply an estimated 20x jump in valuation since State Farm Mutual Automobile Insurance Co.'s $5 million investment in CMT about 2.5 years ago.

The SoftBank investment helped CMT edge out health insurtech startup Oscar Insurance Corp., which closed a $375 million transaction in 2018, and eclipsed trading app maker Robinhood Financial LLC, which completed a $363 million raise. Those rounds valued Oscar at $3.75 billion and Robinhood at $5.6 billion on a post-money basis.

Robinhood is similar to CMT in that, with the latest raise, it has aggregate funding to date in the $450 million to $550 million range. We were unable to find a post-money valuation for CMT and, since the company is private, we do not have access to its financials. But based on 10 U.S. companies that have raised an amount in the $450 million to $550 million range, S&P Global Market Intelligence estimates that CMT's valuation could be more than $2 billion.

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Given the Vision Fund's size and investing history, it is not surprising that it would make a $500 million investment. The Vision Fund reported $97 billion of committed capital as of Dec. 31, 2018, and a related fund, known as the Delta Fund, had $6 billion. Their mission is to make "unprecedented large-scale and long-term investment[s] ... in foundational platform businesses seeking to enable the next age of innovation." The salient question, from our perspective, is whether a valuation north of $2 billion for CMT would be warranted.

If CMT were indeed valued at that level, it would represent an enormous leap from August 2016, when State Farm invested $5 million in CMT's preferred stock. While we do not know the exact stake that State Farm received, the insurer disclosed in a filing submitted to the Federal Reserve that as of year-end 2016 its ownership in CMT was a non-control investment of between 5% and 25%. Based on those percentages, a $5 million stake would imply a value for CMT of between $20 million and $100 million.

Peer analysis

CMT's $500 million raise also looks rich based on competitor Octo Telematics SpA. Like CMT, Octo provides a suite of telematics solutions, including a mobile app that collects driver data, and analytics capabilities to develop risk scores for drivers. While most of Octo's revenues come from Italy, where it is based, it also has a North American presence. Octo's North American operations generated €56.5 million in 2016, which translated to $59.6 million using the exchange rate at the end of the year. North America made up nearly 20% of Octo's $301.4 million in total revenues for 2016, which was the last year for which we could find such data.

Octo was acquired in 2014 for less than $560 million, based on the value at the time of closing, which is only a bit higher than SoftBank's investment in CMT. Octo was not a younger company at the time of sale, either. Octo was about 12 years old, whereas CMT received its SoftBank investment about eight years in. Octo started in 2002, which has allowed it to, among other things, collect a vast amount of data. Octo claims to have the largest global database of telematics data, with over 228 billion miles of driving data and 456,000 crashes and insurance events as of Dec. 30, 2018. CMT said in an October 2018 product filing that it has recorded "well over one billion miles of driving data."

Since 2014, Octo has likely grown its presence in the North American market with the acquisition of Willis Towers Watson PLC's usage-based insurance assets. This gave Octo additional firepower in terms of risk scoring, with the addition of Willis Towers Watson's DriveAbility score. Our analysis of U.S. insurance product filings found mentions of DriveAbility from over a dozen insurers, including units of some large insurers such as Nationwide Mutual Group and Kemper Corp.

Another potential comparison in the U.S. market is TrueMotion Inc., formerly known as Censio. TrueMotion is, like CMT, a Massachusetts-based company that is less than a decade old and has several top U.S. auto insurers as clients. For instance, TrueMotion built the mobile-app version of Snapshot for Progressive Corp. in 2015. Prior to that, Snapshot relied on a device, sometimes referred to as a dongle, that plugs into the car's onboard diagnostic port.

Public disclosures indicate that TrueMotion has raised less than $16 million, a staggering disparity when compared to CMT. In 2015, when TrueMotion announced a series A funding round, it said it had raised about $13 million, and in 2017 it filed a Form D indicating the sale of $2 million worth of securities.

Insurance clients

S&P Global Market Intelligence found that TrueMotion has at least five of the top 10 private auto insurers as clients, based on the rankings of direct premiums written in the U.S., excluding territories, by auto insurers in 2017.

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The combined U.S. private auto market share of all the U.S. clients we were able to confirm was about 25%, which was on par with the U.S. insurance clients we were able to verify for CMT.

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CMT's client roster is heavily dominated by State Farm, which held a commanding 18% of the U.S. private auto market at the end of 2017. While State Farm developed its mobile app in-house and does its own data analysis for its Drive Safe & Save program, it uses CMT for a Bluetooth beacon that it sends to telematics customers. The beacon allows the user's phone and the Drive Safe & Save app to record trips automatically.

Competitive advantage

While Octo might have formed earlier, CMT says it had a head start on using mobile phone technology in telematics programs. "When we started CMT in 2010, no one else was building a smartphone telematics system," the company indicated in a product filing. As a result, CMT believes it has the largest collection of smartphone telematics users and data sets in the world, which it estimates is about an order of magnitude bigger than others.

Based on a review of U.S. patent data, CMT did indeed beat out Octo and TrueMotion in terms of how early it applied for a patent. CMT filed one, which was granted, in November 2012 for an approach to telematics using mobile devices and a map-based system that calculates a trajectory based on phone readings. CMT applied for another in 2013 and three more in 2016, all of which were granted. Octo applied for patents in 2015 and 2016, both of which were granted. TrueMotion has been granted four patents, but its number of pending applications is almost double that, at seven. This analysis was based on data from the U.S. Patent and Trademark Office and relies on the institutions to which the patents were assigned, namely Cambridge Mobile Telematics, TrueMotion Inc., Censio Inc., Octo Telematics SpA and Octo Advisory Inc.

CMT also promotes the accuracy of its data, which it says is greatly improved by the use of tags. In its DriveWell telematics program, some users install a DriveWell tag, which is a wireless device attached to the vehicle frame that collects accelerometer data and communicates with the smartphone. This additional source of data, CMT says, improves its algorithms across the board, both for those that use the tag (which is aimed at commercial fleet operators) and those that use only the smartphone app without the tag.

Having an early start in the use of smartphones for telematics does seem like a competitive advantage, particularly since many U.S. insurers are moving in that direction. Some still rely on the dongle, but the majority of the top 10 U.S. private auto insurers offer a mobile app version of their telematics programs, as our analysis of the market in May 2017 found. But that said, CMT is not alone in offering this technology, as we have already demonstrated, and in the absence of financial data from CMT, the SoftBank investment still seems high.

Then again, it is tough to argue with the performance of the Vision Fund and Delta Fund thus far. From the second quarter of 2017 to the fourth quarter of 2018, the two funds have produced about $10 billion in pretax income. Dividing income by the committed capital of the two funds yields a return of about 10%, which is on par with the total return of the S&P 500 over the same period.

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Perhaps SoftBank does indeed have superior vision.